With the Fed standing pat on short-term rates, what are the smart moves for you to make?

Home equity loans:
Home equity loan rates tend to follow the prime rate, though rates on longer-term loans (those with terms of 10 years or 15 years, for instance) behave more like long-term, fixed-rate mortgage rates.

Best move now:
It’s anyone’s guess what the Fed will do in its next couple of meetings. Maybe it will cut short-term rates in reaction to events in the Middle East. Maybe the economy will go into recession again. If the Fed cuts short-term rates, the prime rate will drop and so will rates on home equity loans.

On the other hand, the situation in the Middle East might be resolved satisfactorily and the economy suddenly could go gangbusters, and the Fed would be tempted to tap the brakes by raising short-term rates.

Bottom line: Don’t time your home equity loan based on guesswork about what the Fed might do this year. If you need to get a home equity loan, go ahead.

Even if rates drop afterward, you can relax knowing that you still got a good rate by historical standards. Equity loan rates averaged 7.72 percent Jan. 22. Use Bankrate’s home equity loan search engine to find the best rates in your area. You’ll find the lowest rates on the shortest-term loans (say, three to five years).

Home equity lines of credit:
Most equity lines of credit feature variable rates and payments tied to the prime rate, which moves up and down with Fed rate actions.

Best move now:
Even if the Fed cuts rates later this year — and that’s a big “if” — your monthly payment on a home equity line of credit might not decline if it has a minimum interest rate or a minimum monthly payment. Check the loan paperwork and see.

Home equity lines of credit tend to have lower rates than home equity loans, but because the rates adjust with the prime rate, they’re at or near their lowest point. Consider getting a home equity loan instead of a line of credit. You’ll pay higher interest initially on a home equity loan, but the rate won’t go up. The rate on a home equity line of credit will rise eventually — probably higher than the rate on today’s home equity loans.

Equity line of credit rates averaged 4.78 percent Jan. 22.
Search for the best HELOC rate in your area.

— Posted: Jan. 29, 2003